Chapter 15 - Earnings Per Share

earnings per share

measures company’s profitability

2 types of EPS

basic EPS, diluted EPS

basic EPS

measures amount of company’s earnings attributable to each common shares based on WASO

diluted EPS

measures amount of company’s earnings attributable to each share in a hypothetical worst case scenario in which all dilutive securities are converted

dilutive securities

give holder option to convert them into common shares

EPS used for

assess company performance, predict future earnings, estimate value of firm’s shares

simple capital structure

basic EPS only

complex capital structure

basic and diluted EPS, only basic EPS if all POS are antidilutive

basic EPS calculation

net income available to ordinary SH / WASO

WASO

weights are # of months a share has been outstanding during fiscal year

potential ordinary shares

FI or other contracts that may entitle its holders to common shares

dilutive POS

conversion would decrease basic EPS

antidilutive POS

conversion would increase basic EPS

incremental EPS

quantifies relationship between income and share effect of dilutive POS if converted

income effect

incremental after tax income available to ordinary SH if POS was converted

share effect

incremental # of ordinary SO if POS was converted

2 methods of calculating incremental EPS

if converted, treasury stock method

formula for treasury stock method

N x (S - K) / S